With earnings season in full swing, there were a number of changes to broker ratings. Downgrades dominated, as many stocks are seen to be fully priced. While earnings are generally in line with expectations, there aren’t too many companies reporting well ahead.
Challenger received two upgrades and one downgrade, while Macquarie saw two downgrades.
In the good books
Amcor (AMC) was upgraded to Neutral from Underperform by Credit Suisse. First half results were slightly below the broker’s expectations. Credit Suisse observes, even after executing a US$500m share buy-back, Amcor will have US$1.3bn in acquisition capacity through debt. In the absence of acquisitions, further buy-backs appear to be a likely scenario and the broker believes another US$500m could be bought back in FY17 without exceeding 2.5 times net debt to earnings. Target is raised to $14.40. Market sentiment is now neutral at +0.0.
Cardno (CDD) was upgraded to Neutral from Underperform by Macquarie. Cardno’s 17% profit decline from the previous first half was roughly in line and in accordance with the recent warning. Management expects improvement in the US, aided by the A$, but ongoing tough conditions locally. The broker believes the full impact of commodity price falls is yet to flow through to customer demand. However, Cardno’s steep share price fall on the earlier profit warning puts the stock at a large discount to peers, hence an upgrade to Neutral. Target falls to $3.12 from $3.52. Market sentiment is now +0.3.
Challenger (CGF) was upgraded to Buy from Neutral by Citi, and to Neutral from Underweight by JP Morgan. According to Citi, Challenger’s first-half result was broadly in line with expectations, guidance for retail liability book growth improving along with the dividend, but earnings falling just shy of the mark after a capital dilution. Guidance was revised slightly but overall, the broker says the removal of some uncertainty was the main theme of the result (although there is still enough uncertainty to keep the target price below spot valuation).
The broker notes margin compression in the Life business and weakness in Funds Management. While capital consumption was up, Citi sheets this back to one-offs and says a Tier-2 raising could fund strong growth if need be. The broker says Challenger offers value, has strong sales potential and the dividend in the second half will be 100% franked.
For JP Morgan, Challenger’s first-half net profit fell a tad short due to margin pressure and capital surplus erosion. But JPMorgan notes strong annuity sales, a confidence-inspiring shift into less capital-intensive products, receding DSS risk and growth potential if the Murray recommendations are implemented. The broker expects margin pressure to continue but pricing pressure to wane, and says net book growth was strong in the first half. Rating upgraded to Neutral from Underweight.
With Deutsche going the other way (see in the not-so-good books below), market sentiment on Challenger is now +0.4.
GWA Group (GWA) was upgraded to Buy from Hold by Deutsche. First half results were in line with expectations. Deutsche Bank believes there is solid growth potential in FY16 because of volume and price growth, a capital return (potentially) and removal of the Wetherill Park inventory overhang.
Accordingly, Deutsche Bank upgrades to Buy from Hold. Target is reduced to $2.61 from $2.69. With Citi going the other way (see below0, market sentiment is now +0.0.
Citi upgraded Paladin Energy (PDN) to Neutral from Sell. The new convertible note issue significantly reduces Paladin’s refinance risk and leads the broker to upgrade to Neutral from Sell. Target rises to 40c from 35c. However while the broker is bullish on uranium, it does not believe prices will rise fast enough for Paladin to avoid additional debt or asset sales in order to repay the issue due on 2017. Market sentiment is now +0.4.
Credit Suisse upgraded Steadfast Group (SDF) to Outperform from Neutral. The interim report proved quite an event with Steadfast also announcing a number of acquisitions, plus an equity raising and an increase in debt. The interim results itself were weak, reflective of a turn in the insurance cycle, comment the analysts. CS is supportive of the acquisition strategy and sees potential from cost cutting too. On this basis the rating has been lifted to Outperform from Neutral. Target price lifts to $1.70 from $1.66 on slightly higher estimates. Market sentiment is now +1.0.
Citi upgraded Tatts Group (TTS) to Buy from Neutral. The stock has been viewed as a predictable defensive investment given stable lottery earnings but Citi believes the company has several strategic options, which could drive significant value. The broker incorporates a new risk-weighted methodology that better captures these options. Citi notes, following the successful legal claims in Victoria, the company has extra cash for licence renewals and acquisitions. Citi’s target rises to $4.40. Market sentiment is now +0.1.
In the not-so-good books
ANZ was downgraded to Sell from Neutral by Citi. ANZ’s first-quarter result fell shy of Citi’s forecast as revenue flattened in global markets. Citi notes the bank’s organic capital generation is struggling and the payout ratio is under threat. The broker says the bank is looking pricey and shaves 2% off earnings estimates. ANZ is downgraded to Sell from Neutral, joining its peers as Citi sours on the sector. Target price steady at $32. Market sentiment is now -0.3.
Aurizon Holdings (AZJ) was downgraded to Neutral from Buy by Citi. First half earnings were below the broker’s forecasts. Management has identified additional savings and opportunities to increase efficiencies. Nevertheless, Citi considers pending industrial action and challenging markets in coal and iron ore make the drivers of a return to strong growth difficult to identify. The broker also believes the re-pricing of contracts is slowing. The target is reduced to $5.10 from $5.40. Market sentiment is now +0.6.
Bendigo and Adelaide Bank (BEN) was downgraded to Sell from Neutral by UBS. First half results were ahead of UBS but the composition of the result disappointed. UBS downgrades earnings forecasts by 4.0% for FY16. While further interest rate cuts may support the share price, UBS believes capitalising mark-to-market house price gains is dangerous and that the share price has rallied too far, too fast. Market sentiment is now -0.1.
Challenger (CGF) was downgraded to Sell from Hold by Deutsche. First half results were well below the broker’s forecasts. The challenges of a lower interest rate backdrop for the life business are starting to show, in Deutsche Bank’s view. While profit growth will remain supported by recent capital raisings, the broker believes new business margin pressure will emerge more clearly in FY16. Hence, while the company is upbeat on annuity growth prospects, lower margins/returns on equity reduce the appeal. Rating is downgraded to Sell from Hold and the target to $6.05 from $6.25. (see in the good books above).
Fortescue Metals (FMG) was downgraded to Sell from Neutral by Citi. Fortescue’s interim slightly outpaced consensus and the broker on most metrics save net profit after tax, which fell 16% shy of the broker thanks to higher depreciation and amortisation and interest costs. Citi cuts its target price to $2.20 from $2.40 accordingly. The broker is bearish on iron-ore prices and, given the company’s increase in net debt over the period, downgrades the stock to a Sell from Neutral. Market sentiment is now +0.3.
G8 Education (GEM) was downgraded to Neutral from Outperform by Macquarie. After a sustained period of acquisitions, and another 12 childcare centres added along with the result, G8’s revenue and earnings missed the broker’s forecast and guidance. The industry remains rife for consolidation but G8 is starting to pay full price, the broker notes. Further acquisitions may require additional capital, the broker warns, while competition is increasing and a Productivity Commission investigation into childcare promotes uncertainty. Target falls to $4.93 from $5.35. Market sentiment is now +0.4.
GWA was downgraded to Neutral from Buy by Citi. GWA Group’s result failed to impress Citi. The broker says strategy execution has been underwhelming, that the Group has failed to stabilise Gliderol’s profitability and that a recovery from Gainsborough will take longer than expected. The broker believes a shift to medium to high-density dwelling will also take its toll. There were plenty of positives, including the second-half capital raising, but the deciding factor was the high price earnings ratio, the stock trading 21% above its historical price-earnings multiple of 13.9x (despite yesterday’s correction). Citi cut the target price to $2.67 from $3.30.
Iluka Resources (ILU) was downgraded to Hold from Buy by Deutsche. The 2014 loss was more than Deutsche Bank expected. The dividend improved with a 40% free cash flow payout, while net debt is at $59m. The focus has returned to a decision on replacement projects. The broker observes some encouraging early signs for zircon sales in 2015. Target is unchanged at $7.50 but the broker downgrades to Hold from Buy following the recent strong share price performance. Market sentiment is now +0.6.
Macquarie (MQG) was downgraded to Neutral from Buy by Citi, and to Hold from Add by Morgans. Citi says that it’s all go at Macquarie, the group reporting in line with January guidance, and tipping earnings growth at the top end of its 10%-20% guidance. Citi notes the tax rate has peaked, operations are upbeat, and most businesses improved over the period. The broker bumps up the target price to $70 from $66 but downgrades the stock to Neutral from Buy given recent share price strength.
For Morgans, Macquarie’s quarterly update highlighted ongoing momentum as capital markets benefit from improved trading conditions. Morgans envisages upside risks to FY15 growth guidance of 10-20%. The broker downgrades to a Hold rating from Add, given recent share price gains and believing the upside is largely priced in. Target is however raised to $73.50 from $62.00.
Despite these downgraded, market sentiment on Macquarie is still positive at +0.4.
Citi downgraded Sims Metal Management (SGM) to Sell from Neutral. The benefits of the review to focus on earnings per tonne were clearly evident in Sims’ first half result but on the 11% share price rally, the broker has downgraded to Sell. The review has drawn focus away from the key driver of volume, the broker suggests. While the broker has lifted margin expectations, its earnings forecast rise modestly after lowering volume expectations in a deteriorating scrap market. Target falls to $10.40 from $10.50. Market sentiment is now 0.0.
Morgans downgraded Seymour Whyte (SWL) to Hold from Add. Morgans notes the good guidance for the results and believes, with the current order book, the company can achieve reasonable growth given its NSW exposure and Rob Carr business. That said, until the new government in Queensland unveils its infrastructure plans, the broker downgrades to Hold from Add. The company is still considered one of the better-placed infrastructure services businesses, with strong balance sheet and dividend support. Target is lowered to $1.50 from $2.03. Market sentiment is +0.5.
The above was compiled from reports on FNArena, which tabulates the views of eight major Australian and international stock brokers: BA-Merrill Lynch, CIMB, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Macquarie and UBS.
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